Greater adherence to institutional norms and lower trade barriers will give Mexico economic benefits with the incoming US government, but there are risks related to the energy sector.

Change brings both good and bad.  The bilateral relationship changes that will arise from dealings between Mexico and the new Biden Administration will be no different. Joe Biden triumphed over Republican Donald Trump this past November in the U.S. presidential election.  As a result, the relationship will likely leave behind four years of economic volatility and immigration uncertainty. It will enter a phase that is characterized by greater adherence to institutional norms.

However, the arrival of a new president at the world’s greatest economic power also poses significant challenges for the country, especially in energy and trade.  Some of the Pros and Cons that will characterize the relationship between Mexico and the new Biden Administration are presented below.

Pros

• President Biden’s administration will most likely resume a more proactive participation in multilateral agencies such as the World Trade Organization (WTO).
• It is anticipated that a more delimited approach to protectionism will characterize ongoing trade relations between Mexico and the new Biden Administration, and deepened trade ties will result from the United States – Mexico – Canada Free Trade Agreement (USMCA).
• An agenda that emphasizes creating a green infrastructure will allow the Mexican companies in this sector to enjoy greater opportunities for expansion and growth.
• The new US head of state will demonstrate greater support for globalization and international trade, which is expected to produce benefits for Mexico and the new Biden administration.
• Although it is not expected that the Biden Administration will not escalate the US trade war with China, some restrictions will remain in place. Continued restrictions placed upon the sale of Chinese steel in the United States, for example, will favor Mexican producers of the commodity.
• President Biden may end up negotiating some infrastructure spending with a divided Congress. This could open up opportunities for some Mexican exports.
• In the early days of the Biden administration, the Mexican peso has also benefited from the election of the Democratic candidate. Recently it achieved an appreciation of 29.3 cents against the US dollar to be quoted at 20.31 in the American currency in the wholesale market.
• The enactment of a new fiscal stimulus plan will contribute to the United States’ economic recovery and indirectly that of its major trading partners, including Mexico.
• A return to an Obama Administration-like rise in the rate of corporate income tax and a return to a more regulatory regime may motivate more US companies to consider establishing nearshore manufacturing operations in Mexico.

Cons

• Some aspects of the relationship between Mexico and the new Biden Administration will be shaped by the fact that Democrats control both US Congress houses. As such, the Biden Administration will focus on renewable rather than traditional energy sources.  This may harm the Mexican energy sector.
• Although the Biden Administration will take a more flexible approach, the immigration issue will continue to be the source of friction on both sides of the United States – Mexico border.
• Gabriela Siller, Director of Financial Economic Analysis at Banco Base, goes beyond the warns of 4 diplomatic and health challenges for Mexico:

1. The possibility of stricter health and safety measures imposed upon Mexico’s products by a Democrat-controlled Congress generates higher costs for Mexican exporters.
2. The possibility of a revision of the USMCA, particularly related to wages and salaries.
3. The potential for diplomatic frictions between President Armando Lopez and US President Joe Biden.
4. The possibility that the Biden Administration raises the minimum wage in the US. This could slow the country’s economic recovery, therefore indirectly affecting Mexico’s recovery that is almost entirely based on its northern neighbor’s economic well-being.

• The Democratic victory may hurt the Mexican economy in that the Biden Administration continues to promote Buy American This program promotes the purchase of domestically manufactured products by the US government and promotes investments by companies at home rather than abroad.

A warehouse is the functional unit of a manufacturing firm that responds to particular objectives of support, control, and supply of raw materials and finished products. When there is optimal warehouse management in Mexico, improved costs and execution times favorably impact the company’s overall performance.

Having a warehouse management system in place to service Mexican manufacturing facilities helps companies to organize their operations and the flow of goods to and from the warehouse. This will result in a boost in company efficiency and will improve the organization’s overall productivity.

What is warehouse management in Mexico?

Warehouse management in Mexico is a comprehensive logistics process that ranges from the admission of material within the warehouse to its point of consumption. Therefore, it is a task that is designated to all of the activities related to the stock of materials and finished products.

It is a substantial part of lean manufacturing because it is a methodology that is designed to avoid excess stock to reduce waste and expense.

Warehouse management within the logistics process map: Limits and responsibilities

Warehouse management aims to optimize each stage of the production process to sustain, in a timely and constant manner, the supply and distribution of materials and products. It is one of the most essential activities for the successful operation of a company.

It is possible to place this work within a map of logistics processes.  The logistics process map includes:

• • Planning
  • Supply
  • Inventory  management
  • Warehouse management
  • Order management
  • Distribution
  • Customer service

Importance and objectives of warehouse management in Mexico

Warehouse management in Mexico provides superior value in monitoring services and products. That is, it has a positive impact on the performance of the supply chain and, therefore, also on customer satisfaction.

Additionally, it ensures the correct execution of the company’s multiple logistics processes ranging from sourcing to distribution of different goods and services, while maintaining a balance at all stock levels.  This allows the delivery of an immediate response without delays in the production chain.

This process is closely related to the supply chain.  Its optimal operation depends on an appropriate strategy and the implementation of technologies that streamline and automate the activities of different departments.

The objectives of warehouse management are to:

• Speed up deliveries of goods.
• Monitor each stage of the products.
• Increase staff productivity.
• Ensure deliveries in a timely way.
• Improve product quality.
• Maintain price inventories.
• Reduce operating costs.

Warehouse functions

A warehouse is a structured plant that regulates the flow of product stocks and performs the following functions:

Receiving goods

It allows companies to receive goods that have been sent by suppliers, checking that each one matches delivery documents and the quantity and quality of the order that has been made.

Storage

Determines the ideal location of the goods to promote their rapid location and handling. For this, it relies on fixed media such as tanks, industrial supports, shelves, etc.

Conservation

The preservation of stored items in good condition involves keeping them under hygienic and specified safety standards that have been defined for each item.

Existence control

This feature is key to determining the number of products in stock and how often more will be requested on each order to maintain and minimize storage costs.

Principles of warehouse management in Mexico

The storage and control of materials and products raise the cost of the latter without adding additional value. Despite this, they are mandatory activities within production operations. Companies must therefore be governed by the following fundamental warehouse principles:

• Entry to the warehouse will be restricted to essential personnel.
• The safety of the goods must be the responsibility of a single person.
• Input and output operations must have authorized documentation.
• Warehouse staff will be assigned according to their particular role to be performed.
• There should only be a maximum of two doors in the warehouse with the relevant security controls.
• Inform the inventory control and accounting area about all entries made in the warehouse.
• Products must have an identification card and a code for inventory control.
• Each material will be placed in the warehouse according to its classification to facilitate its location.
• Flexible warehouse distribution should be ensured to allow for variations with minimal investment.

Warehouse management processes

Warehouse management in Mexico has two cross-cutting guidelines, which are its main processes: Planning and organizing information. Under these two primary functions, there are further processes that complement warehouse administration activity.

Planning and organization

This stage of the process is a strategic point that provides balanced resource solutions under the policies and goals that have been defined to achieve the company’s overall strategy to improve its competitive position in the market. The activities to be performed in this process are:

Design of the distribution network

Companies that are manufacturing in Mexico must set distribution policies according to the industrial sector to which they belong by optimizing responsiveness to control demand variants.

The design of the distribution network includes the tactical location of warehouses and distribution centers that allow the management of the flow of products from their entry into the warehouse to their delivery to the customer.

On the other hand, particular distribution and storage requirements are identified to determine the type of warehouse and distribution centers that best suit needs and increase efficiency.

Responsibilities of warehouse management in Mexico

This is the process that defines whether the warehouse will be self-managed or subcontracted out to a third-party for administration.  Highly competent third parties such as Tecma can offer greater control, long-term cost reduction, and the optimization of human resources.

Additionally, outsourcing this function promotes capital conservation and timely knowledge of storage and maintenance costs. Also, it supports the expansion of warehouse spaces to meet market demands.

Warehouse size

The dimensions of a warehouse must correspond to product and demand characteristics. Other factors that must be considered for calculating the size of warehouses are:

• Levels of customer service
• Storage systems
• Production times
• Layout of stock
• Aisle requirements

Warehouse design

To achieve an optimal and efficient flow of materials, the warehouse and distribution center must be located in the appropriate area under the conditions that allow all operations to be carried out.   It is also necessary that appropriate equipment and technology be present.

Warehouse design facilitates order preparation and accuracy, as well as stock placement to drive competitive advantages with diligent ordering cycles and better customer service.

Reception

This is a process of planning the entry, unloading, and verifying goods which aims to automate each stage of receipt to minimize human intervention that does not directly add value to the products.

Storage

This process is related to the preservation of products to avoid risks to warehouse personnel and the physical warehouse itself.   For this purpose, the warehouse space must be divided into the following areas:

1. Reception
2. Reserve stock
3. Preparing orders
4. Consolidation
5. Maneuver
6. Offices

Movement of goods

Moving the goods is possible thanks to various conveyances that allow the simultaneous handling of various materials from the reception area to the storage location.

Information

Warehouse management in Mexico focuses on improving the efficiency of the flow of goods and consequently the flow of information, which is an axis of orientation. This thread is applied in each of the above because each thread requires performance reports that help record daily activity and process evolution.

MRP software for warehouse management in Mexico

Warehouse management in Mexico involves multiple processes through which goods and products are handled.  When manufacturers have robust inventories, it becomes a complex proposition to manage them.  This precipitates the need to put technology to use. Enterprise software is required.

Thanks to MRP software it is possible to enhance the profitability of companies by providing an advanced strategy of planning and control of the materials and the production process to which they are subjected.

This system optimizes the production, scheduling, and control of stocks used in warehouse management in Mexico.  Its activity within each company focuses on the:

• Planning of production activities and delivery orders.
• Automatic updating of stock reports for materials and products.
• Supply of materials to the production area and the maintenance of consistent product availability for delivery to customers.

With Visual ERP companies can manage and control their warehouse.  Thanks to this tool MRP systems facilitate tasks not only at the operational level but also at the administrative level. This allows access to a broad knowledge of the performance of activities, which facilitates good decision making and internal communication

Entrepreneurs, journalists, officials, and experts from the financial sector were recently convened by the Spanish publication EL PAÍS to analyze the climate for investment in Mexico.

It’s the right time to consider investment in Mexico. That was the clear declaration that was made by José Aljaro, CEO of the Spanish company Abertis, during the virtual Invest in Mexico forum that was recently organized by the prominent Spanish newspaper EL PAÍS.

For Aljaro, despite the heavy blow that the COVID-19 pandemic inflicted on the global economy, there are still international companies that are willing to continue to invest their money. Investment in Mexico, he said, continues to be an especially attractive option.

According to the Spanish CEO, “Business activity continues. We must take advantage of the present circumstances, even if the health crisis has affected us in an adverse manner. We need to identify countries where economic growth can be achieved.”

As an example, he cited the case of his highway management company, which currently has investment plans of approximately 8 billion Mexican pesos to expand the road network in that country.

Why make such an investment in Mexico? Aljaro did not moderate his praise when he stated that, “We chose it as the target country for our efforts because it serves as a link to the United States, Canada, and Latin America.  It has extensive experience with public-private collaborations, as well as with legal certainty and with great transparency.  Profitable investment in Mexico can be both long and short term in scope.”

Through a virtual meeting, entrepreneurs, journalists, officials, and experts from the financial sector analyzed the areas that are most suited for investment in Mexico, as well as the challenges and competitive advantages offered by that nation. One of those challenges discussed during the forum was the impact the pandemic has had on Latin American economies as a whole. Adriana Arreaza, director of macroeconomic studies at CAF – Development Bank of Latin America, explained that, due to the health emergency, the region’s economy will suffer a collective contraction of 8% of GDP annually and will be the source of  “severe social consequences”, including the closure of 2.5 million companies (mainly SMEs).  This could potentially translate into the loss of more than eight million jobs.

This is, he said, a decade-long setback in terms of poverty reduction and inequality in the region. “Economic growth must be generated to reverse these losses,” Arreaza warned. To achieve this, the expert has recommended generating greater tax revenue, increasing labor productivity, establishing clear rules of the game that favor investment in Mexico, and developing efficient social protection programs.

Referring further to Mexico, Arreaza explained that one of the challenges that it must overcome is the reduction of economic activity in the large informal sector.  According to official government data, more than 30 million people work in this sector, which adversely impacts the country’s economic health and well-being.

Arreaza went on to state that companies that operate outside of the formal economy, with little access to credit and exceptionally low productivity, make the average progress of the economy as a whole constrained by the weight of informal economic activities.” She went on to add that, the government must concentrate its efforts on generating and attracting infrastructure investment in Mexico. “That’s going to be key because it facilitates the connection between production centers and end consumers.”

It is on infrastructure that investors set their eyes during the virtual event. Mexico has enormous growth potential because it has the United States and Canada as its main trading partners, as Mexican exports to North America account for almost 35% of GDP.

In addition to this, the Mexican Government has committed to a new economic boost with the entry into force of the new United States-Mexico-Canada Free Trade Agreement (USMCA), as well as ambitious investment in infrastructure projects. Mexico, however, also has had strong differences between the well-connected northern region and the south, which suffers a strong lag in infrastructure development. This is how Demetrio Sodi, CEO of RCO, a highway operation company in Mexico assesses the situation.  Industrialized states such as Aguascalientes, Guanajuato, Jalisco, or Querétaro have experienced similar growth to Southeast Asian nations, while states such as Chiapas, Guerrero, and Oaxaca have declined.  This is because they are isolated and have little export capacity. “Investment in the south of Mexico is needed in infrastructure in order to bring about a lowering of transportation costs,” he said.

Sodi went on to state that his company has investment plans of up to 7.5 billion pesos in the near future. “There are many opportunities in the transportation sector. Mexico is a great opportunity in the medium and long term. Investment in Mexico remains among the best bets in the world.”

Regional entrepreneurs recognize the reality of the development of the Guanajuato aerospace industry and the need to take advantage of all the opportunities that the state has to develop this technologically advanced manufacturing.

The foundation of the aerospace activity in Guanajuato is comprised of two important elements: the continuing technological development of the industry and the building of a regional supply base to effectively service it.

Each of  the elements is a pillar upon which the sector will develop its strategies to drive industry growth through manufacturing and “mind-facturing.”   This thought was recently expressed by the treasurer of the Aerospace Cluster of the Bajío, Oscar Rodríguez Yáñez.

The main players in the Guanajuato aerospace industry aim to pursue the development of new technologies that include the incorporation of Industry 4.0, additive manufacturing, composite design, and the Internet of Things (IoT) into their varied manufacturing processes.  According to Rodríguez Yáñez, one of the regional industry’s principal objectives is to concentrate on the development of additive technology, as well the use of stainless steel for aerospace applications, as these are segments of the aerospace industry that are currently in demand.

Supplier development is key to the Guanajuato aerospace industry growth

Developing greater local supply capabilities is another one of the tasks to be performed to further develop the Guanajuato aerospace industry. Oscar Rodríguez Yáñez, who is also the CEO of Optimen, a Mexican software development company that markets technology applications to the airline industry, recently asserted that “in the midst of the current objectives identified by the local industry, establishing strategic alliances will be of fundamental importance to adding new capabilities and to promoting the integration of micro, small and medium-sized enterprises into the region’s aerospace industry supplier base. Although Guanajuato is a relative newcomer to the aerospace industry, the state has a significant manufacturing base and has the capacity to accomplish these goals.  “Being able to do things differently, to take advantage of the muscle we have developed among the small and medium-sized businesses, OEMs, and the cluster of the 240,000 companies in the state is essential to developing a supplier base that can support the emerging Guanajuato aerospace industry.

Orienting the production capabilities of the industry that is found in Guanajuato towards the aerospace industry will be one of the main challenges related to the creation of a reliable base of suppliers in the region.

Among aerospace companies, he said, Optimen focuses on technology development for industry, fleet, and crew optimization, among other applications. The use of Optimen technology can be dedicated to activities connected to the manufacture and maintenance of aircraft interiors.

Together with the Mexican Federation of the Aerospace Industry (FEMIA) the Guanajuato aerospace industry cluster is currently working on a supplier development program, which aims to train 25 potential suppliers in its first phase.

The industry ecosystem created by the automotive industry in Guanajuato, he said, will be of primordial importance in the quest to convert suppliers from the automotive to the aerospace sector.  Another challenge to the development of the Guanajuato aerospace industry is related to the fact certifications for the aerospace industry are different from the accreditations required by the automotive industry. The training and certification process for the aerospace industry requires from one to three years, to obtain.  This is according to the director of the Aerospace Cluster of Bajío, Alejandro Arredondo.

Foreign direct investment in the sector is needed

Also challenging is the fact that from 1999 to the first half of 2020, Guanajuato’s aerospace industry has an extremely limited record of foreign direct investment in the manufacture of aerospace equipment, according to the records of the Secretariat of Economy (SE). During the same period, however, investment by companies manufacturing auto parts, automobiles and trucks, and other transportation equipment has totaled US $6.76 billion.  While the automotive industry in Guanajuato is highly developed, the Guanajuato industry consists of only seven companies that employ approximately 250 direct labor workers to date.

During the period from 2014 to 2019, the Guanajuato aerospace industry reported average annual growth of 18%.  This occurred mainly in the civil and commercial aeronautics subsectors, while projections for 2020 have been undermined by the pandemic’s impacts on civil aeronautics.   For Mexico as a whole, at the end of 2019, this industry reported 368 industrial facilities in the country, with a presence in 19 of the 32 states and a job creation that has exceeded 60,000 positions.

Mexico identifies five main regions of the country for its aerospace industry.  They are Baja California (97 companies), Sonora (58 companies), Chihuahua (52 companies), Querétaro (50 companies), and Nuevo León (33 companies).  This is according to information provided by the Mexican Federation of the Aerospace Industry

As of the first half of 2020, cumulative foreign direct investment (FDI) in Mexico totaled approximately US $18 billion.  Of his figure, manufacturing comprised a 42.8% share, trade contributed 12.9%, and real estate and rental services made up 3.9%.  This information about industry clusters in Mexico is according to data provided by Mexico’s Secretariat of the Economy.

Investments in these three sectors are both, directly and indirectly, related to Mexico’s industrial real estate market.  This includes the purchase or rental of real estate for manufacturing or logistics uses. This movement in the real estate market has given way to a concentration of different economic sectors in specific regions of the country.  The trend has optimized the development and shape of what is known as industry clusters in Mexico.

For the most part, the industry clusters in Mexico that have been located in specific regions over time are automotive, aerospace, food and beverage, medical and electronic devices, to name a few.  These groupings have resulted in a boost in overall national productivity, an increase in global competitiveness, a more dynamic and incentivized system of supply chain, and more closely integrated and consolidated industry value chains.

All of this has contributed to Mexico’s positioning as The United States’ leading trading partner. Similarly, interest by global companies to invest in the country as a result of the recently implemented trade treaty between the United States, Mexico, and Canada (USMCA) has increased.

Automotive industry clusters are in Mexico’s Bajío and the Northeast

The automotive sector is the most important for the manufacturing industry in Mexico.  In 2019, the value of vehicles that were exported to the United States was approximately US $38 billion.

The automotive and auto parts industry cluster in Mexico is located in about 14 of the country’s states.  Automotive suppliers are located principally along the border region and in Mexico’s central Bajío region.

In recent years, the lower-western region of the Bajío has become a principal automotive production area in the country.   The states that make it up (Aguascalientes, Guadalajara, Guanajuato, Querétaro, and San Luis Potosí) have an accumulated aggregate demand for more than 23 million square feet of industrial space.  This was allocated mainly to manufacturing activities from January 2014 to August 2020.

This industry cluster in Mexico is the market that is mostly associated with auto parts according to the National Auto Parts Industry Associations (INA).  Companies such as Aceway and the tire company, Bridgestone, for instance, have recently increased their footprint in the country. This industry cluster in Mexico has been the one that has had the most gross absorption of industrial properties in the last 6 years, with almost 8 million square feet. A good portion of this industrial space is located in the submarkets of Airport, El Marqués, Querétaro Centro, and Norte.

Guanajuato’s automotive cluster is comprised of OEMs such as General Motors, Volkswagen, Mazda, Honda, as well as companies engaged in the manufacture of auto parts.  The market demand for industrial real estate has been more than 6.25 million square feet since 2014.  This industry cluster in Mexico is located mainly in Celaya, Leon, and Irapuato.

In the northeast, the markets of Monterrey, Saltillo, and Reynosa have a significant stake in the automotive sector. These markets had a gross absorption rate in this industry of about 14 million square feet from January 2014 to August 2020.

The Monterrey cluster consists of first, second, and third-tier suppliers, as well as logistics companies. This market had a demand of just below 14 million square feet in the last six years.   The Saltillo, Coahuila cluster focuses on auto parts production.  In the same period, Saltillo had a demand for space from the automotive industry of almost 5.4 million square feet.

In addition, the Mexico City market also has a significant stake in this industry cluster in Mexico, since, starting in 2014 to date, automotive-related industry has had a demand for more than 9 million square feet of industrial space for manufacturing and logistics.  This has been the case mainly in the corridor that includes the municipalities of Cuautitlán, Tepotzotlán, and Tultitlán (CTT).

However, the automotive sector is expected to receive a significant additional boost resulting from the implementation of the new USMCA rules of origin, which state that automobiles must have to increase regional content to 75% in order to be considered originating in North America and to receive duty-free treatment in the free trade zone.

Out of every $10 of Mexican auto parts sold internationally $5 dollars of this figure are sent to the US.

Recent figures demonstrate that the export of Mexican auto parts to the United States is 1.3 times the value of overseas shipments of light vehicles and 5 times greater than the value of the inflow of trucks and tractors.  This is according to data generated by the country’s industry chamber, the National Auto Parts Industry (INA).

The INA revealed that in 2019 exports of parts and spare parts for vehicles manufactured in Mexico and exported to the United States reached a value of $70 billion, while during the same period shipments of light vehicles, truck, and tractors sent to the United States reported revenues of  US $54 billion and US $14 billion, and US $164 million respectively.

Mexico is home to operations of auto parts manufacturers such as Vitro (a Mexican national company), Nemak, Condumex, Metalsa, and Rassini.  Other international firms that have established manufacturing facilities in Mexico include companies such as Continental, Delphi, Bosch, and Yazaki.

Globally, Mexico currently has 13 active free trade agreements that govern trade relations with 52 countries.  These arrangements have enabled the country to export 3.3 million cars per year and US $81 billion auto parts to different nations on an annual basis.

Specialists explained that auto parts manufacturing in Mexico has become relevant because it is a country with competitively priced labor.  This enables quality higher-value vehicles to be manufactured for both businesses and consumers.

“Mexico in recent years excelled in the production of automobiles, but especially auto parts. The United States saw this clearly and that is why it focused the issue of Mexican auto parts exports during the negotiations of the new USMCA (United States-Mexico-Canada Free Trade Agreement),” Rocío Mejía, Global Trade and Indirect Tax Leader of consultancy EY Latin America North observed during a recent presentation on the subject.

Mexican auto parts exports are priced advantageously in the international marketplace because the country is among the nations with the lowest costs for manufacturing between emerging markets, costing $3.73 per hour.   Countries such as China, Turkey, and Morocco are at $4.79, $4.32, and $4.21, respectively per direct labor hour.

Now, with the advent of the COVID-19 pandemic and the recent implementation of the USMCA, the opportunities for the attraction of greater foreign direct investment attraction in the sector that drives Mexican auto parts exports in Mexico have increased  This is because manufacturers are seeking to reduce their costs and Mexico offers them the opportunity to do so.

“The coronavirus health crisis has added an additional variable to the trends that are governing supply chain development. Additionally, we have data that indicates that in 2019 about 19 percent of executives in the United States was rethinking the option of moving their supply chains from China to the region (North America).  This is because of the trade war between the US and the Asian nation.  Because of the coronavirus manufacturers seek to have more resilient supply chains,” asserts Carlos Zegarra, a leading partner of Management Consulting at PwC Mexico.

While Albrecht Ysenburg, KPMG’s leading automotive industry consultant in Mexico, has observed that the global pandemic will now motivate industry to focus on a more operational and survivable approach to their supply chains. This makes an increase of Mexican auto parts exports almost a certainty.

“Companies must develop independent regional strategies for both customers and markets. Mexican companies will need to position themselves to meet the different needs of the buyers of their products,” he said.

Mexico has 26 development centers in the automotive industry, which employ 15 thousand 680.  Global companies such as Ford continue to expand their footprint for this type of activity.

European and Asian, customer potential

Faced with the new regional content rules that automotive manufacturers must comply with under the new USMCA in order to qualify for duty-free treatment, European and Asian vehicle assemblers are the main potential customers for North America produced auto parts.

Information from the American Automobile Labeling Act reveals that Ford, General Motors, and Fiat Chrysler Automobiles (FCA) meet a regional content value of 81 percent on average, far exceeding the 75 percent called for under the new trade agreement between the three North American countries.

However, Asian firms like Nissan, Toyota, Mazda, Honda, and KIA have a much lower average of North American content at 67 percent.  Among these brands, the Korean car manufacturer, KIA, is the least compliant with an average of between 49 and 50 percent.

In the case of European producers such as Audi, Volkswagen, BMW, and Mercedes Benz, the regional content average is 49 percent.  Germany’s BMW’s compliance is only at 35 percent.

The electronics industry in Baja California has 184 manufacturing plants and hundreds of suppliers that have generated more than 120,000 direct jobs, of which about 64% are concentrated in the city of Tijuana.

Saul de los Santos, head of the Sectoral Articulation Commission of the National Chamber of the Electronics Industry, Telecommunications and Information Technologies (Canieti) Northwest, recently asserted that the electronics industry in Baja California has the largest concentration of companies and jobs in the electronics sector not only in Mexico but in all of Latin America.

Because of its preponderant position within Latin America, the Baja California electronics industry has developed to the point of being able to compete successfully on the global playing field, said de los Santos, who authored the report Electronics Industry Opportunity Study in Baja California.

He explained that his research work revealed that there is currently a base of approximately 120,000 people that work in this sector, making the electronics industry in Baja California a national and regional economic powerhouse.

This proliferation of electronics companies in Baja California means that there are firms that are currently manufacturing televisions and other products that are more specialized and technologically advanced value-added items.  It also means that the sector can accommodate new, technology-based and small local companies that have been formed by local engineering graduates and regional research centers

According to de los Santos, the immediate challenge for the electronics sector in Baja California is to develop more advanced technical capabilities.  This is because, although the industry is firmly established in the state, it needs to be modernized to meet current market demands.  Modernization of the electronics sector involves training the engineers that are already in the industry, as well as developing new generations of trained technical talent.

He went on to note that, in addition to manufacturers from the United States, Japanese and Korean companies have developed noteworthy technological capabilities in the region.  The entry of more firms into the electronics industry in Baja California has precipitated increased efforts to get educational institutions to establish more academic programs that are effective in producing the human resources that are needed to fuel the sector’s growth going forward.

De los Santos points out that the electronics sector in Baja California is comprised of 184 manufacturing plants and hundreds of supplier companies that, in the aggregate, generate more than 120,000 direct labor jobs in Tijuana and other communities in the state.  It is noteworthy to point out that about 64% of the positions in the electronics industry are concentrated in Tijuana.

Furthermore, Saul de los Santos also indicated that the electronics industry in Baja California is the source of products such as televisions, electro-medical devices, sensors, and vital sign meters used in health applications, as well as sensors and parts that are incorporated into aircraft as well as automobiles.

Additionally, the president of Canieti Northwest, José Elizondo Siller, recently stated that the diversity of modern capabilities that are found in the electronics industry in Baja California will enable the region to create opportunities to attract more employment while generating more foreign direct investment.  In addition to this, educational institutions in the region will continue to produce a more technologically competent supply of human resources that are needed to continue to grow the sector and to boost innovation within companies in the state.

Finally, Elizondo Siller went on to stress that greater linkages between educational institutions and the electronics industry in Baja California need to be created and maintained so that young people continue to pursue careers that are well-remunerated and technologically demanding.

The VSZ-20-2 model ventilator has been developed and is manufactured in Mexico by private companies that included Femsa Torrey and Metalsa with support from the Monterrey Institute of Technology. The first units were acquired by the Slim Foundation.

Mexico recorded its first case of the coronavirus on February 28, 2020.  Since then the number of people that have been infected in the country has exceeded 522,000. Given these numbers, Mexican authorities have faced significant challenges in providing sufficient medical devices to their hospitals and health workers.  To make the circumstances more challenging, these difficulties have been exacerbated by border closures and high global demand for such items.

Because of these circumstances, the Ministry of Foreign Affairs (SRE) and the Salvador Zubirán National Institute of Medical Sciences and Nutrition put out the call for the design of a ventilator to be manufactured in Mexico.  In total, a group of fifteen companies and academic institutions joined forces to take joint action to confront the pandemic.

In a short period of only 10 weeks, a group of companies including Femsa, the Coppel Group, Metalsa, Nemak, and Ternium, as well as universities that include the Monterrey Institute of Technology and Higher Studies, pooled their talents to design a homegrown ventilator.  The result was the low-cost VSZ-20-2 model that would be manufactured in Mexico by using a totally domestic supply chain.

Beyond the production of the VSZ-20-2 ventilator, the Mexican Association of Innovative Medical Device Industries (AMID) released some of its patents for the manufacture of different medical devices, with the aim of ensuring their production.  This was done for the purpose of meeting the increase in demand for this class of equipment in the face of the public health emergency.

Salvador Almaguer, chief operating officer at Femsa Torrey, which normally manufactures equipment for food processing, weighing, and conservation, explained that the groups that started to work on the Mexican made ventilator based their design on free prototypes that were already available on the market.  This was done in order to save time. After the process of securing a design was complete, then the challenge of manufacturing was addressed.

Almaguer went on to observe that “the main effort that was needed was to reinvent ourselves as a company. We had to act in an agile way to be able to align our knowledge and that of the other participant groups to create a product that was manufactured in Mexico that was completely new to everyone.”  For instance, some of the companies that were involved in the project were from the automotive sector.  Although there were others that had experience in the manufacture of medical devices, none of the contributors had ever engaged in the production of a ventilator.

Totally Manufactured in Mexico

The manufacture of each ventilator required at least 17 processes that were executed in different plants around the country.  The challenge for the participating companies and educational institutions was to create the new value chain needed to support the manufacture of the ventilator. “Everyone worked at coming up with solutions. The group of companies faced a supply chain challenge for the prototyping process since there was no organization that had manufactured this product domestically.

The VSZ-20-2 ventilator features a piston-based system that does not require wall air intakes for its operation.  It is capable of functioning with regulated pressure oxygen intake. In addition to this, it has an uninterrupted power supply system that gives it autonomy for at least 30 minutes at full capacity.  It is compatible with any standard two-way ventilation circuit. No internal sterilization system is required.

According to the director of Femsa Torrey, the use of the piston ensures that production can be executed in the volumes that will be required.  Additionally, the production of the ventilator that is manufactured in Mexico is carried out in a plant owned by Metalsa.  Metalsa had to adapt one of its production lines to align with the rules established by Mexico’s Federal Commission for the Protection Against Health Risks (Cofepris).

The project, in its entirety, was developed by Mexican engineers.   The end result was that once manufactured, the apparatus is sold for approximately US $10,000.  This price represents one-fifth of the cost of purchase of high-end respirators, which are priced at around US $50,000.

According to Salvador Almaguer, “The planning process analyzed the capabilities and skills of each of the companies that were involved. The one with the most experience in assembly was Metalsa. We chose to do the work at a plant in Apodaca, Nuevo León, and made the necessary adaptations to an assembly line at the facility.” Metalsa was also responsible for managing the requests for the ventilators and meeting the needs of both public and private clinics and hospitals.

In addition to the ventilators manufactured in Mexico, companies and institutions also developed training manuals for their use.  After the devices were made available, the interest of organizations such as the Carlos Slim Foundation led to the sale of the first 20 Mexican manufactured ventilators.   These units were donated to four public hospitals in San Luis Potosí, Yucatan, Coahuila, and Guerrero.

Almaguer concluded by saying that “the group of companies and organizations worked together not to make a profit but with the shared goal of saving lives.”

Digitization and automation are affecting all industries; more and more manufacturers in Mexico are aware of the importance of transforming their operations with the help of smart technology.

In Mexico, manufacturing accounts for approximately 25% of the country’s Gross Domestic Product (GDP).  Industry has historically been the driver of economic growth in the country. Today the sector has managed to reach an important position worldwide. With smart manufacturing in Mexico beginning to take root, the nation is ready to continue to improve its productivity.  New technologies will enable Mexico to evolve and sustain its global competitiveness.

For manufacturing companies in Mexico, one of the most important challenges is the integration of emerging technologies into existing operations.  These include physical cyber systems; autonomous machines and systems; Internet of Things (IoT); additive manufacturing (3D printing); big data and macro data analysis; cloud computing; simulation of virtual environments; artificial intelligence; cybersecurity; and augmented reality.

Utilizing these technologies is related to the proper integration of traditional IT functions with those that are responsible for innovation in the manufacturing facility through operational technologies.  These are executed in areas such as manufacturing, warehousing, logistics, among others.

Unlike the previous three industrial revolutions, the fourth industrial revolution will allow a large number of technologies to coexist and interact.  This will result in the creation of a connected and interoperable ecosystem with a surprising volume of data and exponential growth in real-time connectivity. Today, smart factories in Mexico must be more connected than ever.  Immediately having valuable information available to decision-makers will have a domino effect across entire organizations and will also have an effect on supplier networks. Thus, Industry 4.0 (or the fourth industrial revolution) has the potential to increase the level of productivity of manufacturing companies in Mexico, and around the world, by 50%.

Today, it is possible to connect all the actors that make up the productive structure of an organization in real-time.  This enhances manufacturers’ ability to respond to important demands efficiently and effectively. For instance, at the start of the day, access to a factory that has employed smart manufacturing in Mexico can be monitored through the use of cameras that are equipped with software that makes it possible to read vehicle license plate information automatically for plant security. On the other hand, cameras that allow security staff to quickly detect suspicious people, vehicles, and other objects thanks to their horizontal, vertical, and zoom scrolling capabilities can be put to use.  These features provide high-quality evidence and optimal video analysis.

On the other hand, two-way digital radio equipment, that is interconnected with high-precision sensors, receive, transmit and analyze voice and data, are able to transmit from anywhere.  This includes information between different functional areas or different geographical regions.

Smart manufacturing in Mexico decentralizes decision-making

Through the data and intelligence generated by new technologies, companies that are running smart factories in Mexico can promote the decentralization of decision making and move from preventive models to predictive models that can be applied in all areas. These include the supply chain (adjusting times in the provision of inputs and minimizing the need for inventories); equipment failure detection systems (eliminating preventative stops and anticipating damage); and in the logistics system (anticipating the requirement for inputs and finished products, making distribution and delivery more efficient).

The intelligent use of information resources is also a necessity for smart factories in Mexico that is reflected in lower costs and increased productivity. With video security, license plate recognition, and telemetry applications, managers can determine which resources are needed to perform tasks more efficiently and to access the correct resources that are required to take effective action.

Each company needs to analyze and define its own goals, strengths, and weaknesses before embarking on its own path of transformation. To be sure, to boost productivity and improve competitive advantage, the next step is to understand how to manipulate a large amount of data to in order to bring about beneficial results

According to consulting firm PwC, the digitization process in the global manufacturing industry expects to reduce costs by more than $420 billion by 2025, as well as sees a potential increase in annual revenues of about $493 billion. This allows us to see that a path of constant changes, opportunities, and challenges for manufacturers continues, where the adoption of global trends in industry 4.0 will increasingly allow the digitization to increasingly consolidate in smart manufacturing in Mexico.

The United States-Mexico-Canada Agreement, or USMCA, is soon entering into force of law.  In order to take full advantage of the opportunities that it offers, Mexico will have to address some challenges as well.

The July 1, 2020 implementation of the United-States-Mexico-Canada Agreement will create many relevant opportunities for Mexico to attract companies from other nations, as well as from its North American partners to set up operations within its borders.

In addition to the several provisions that are built into the agreement that will have a positive effect on the country’s international commerce, Mexico will also continue to benefit from the ongoing US-China trade war and the adjustments that are being made by industry to global supply chains due to the continuing global COVID-19 pandemic.

Especially important is the effect that Chapter 4 of United-States-Mexico-Canada Agreement will have on the Mexican economy and the nation’s ability to attract foreign direct investment.  This section of the pact contains information regarding the new rules of origin that will govern commercial relations going forward between the three North American trading partners.

In the automotive sector, for instance, for a vehicle to now be considered “originating,” seventy-five percent of the value of the content used to produce it must be derived from North American sources.  This figure was considerably lower at 62.5% under the soon to be phased out NAFTA.

This change presents many opportunities, especially with respect to manufacturing operations that are currently located in China.  The Far East economic giant currently exports US $14 million worth of products to North America in the automotive sector each year alone.  It is estimated that, due to the changes in the origination rules for duty-free treatment under the new USMCA, US $4 billion worth of this production will eventually be “reshored” from China to North America.   Mexico is sure to capture a significant portion of this economic activity in the form of capital investment and increased employment in its automotive industry.

Chapter 25 of the United-States-Mexico-Canada Agreement deals with the role of small and medium-sized enterprises (SMEs) in the North American economy.  Its provisions will enable SMEs to have greater participation in the region’s overall trade.  Chapter 19 of the Agreement (dealing with digital trade) creates certainty for North American businesses that are engaged in e-commerce.  This is particularly important because, due to the conditions created by the current pandemic, the sales channel for digital commerce has reached a new and higher level of maturity throughout the continent.

United-States-Mexico-Canada Agreement will also create new opportunities for Mexico as the world transitions from a “Just in Time” model of production to a “Just in Case” supply mode.  The fact that companies will seek to maintain security inventories of more than 5% will create a new and powerful market for investors in real estate.  Securing these inputs will require the existence of an inventory of more than 100 million square meters of industrial properties to store and distribute products.  This represents a significant opportunity for Mexico due to the fact that it will require a doubling of North America’s existing industrial real estate inventory.

What can the Mexican federal government do to benefit from the United-States-Mexico-Canada Agreement?

In order to capitalize on the implementation of the USMCA, the government of Mexico must ramp up its investment attraction and promotion activities.  The Mexican Secretariat of the Economy has absorbed the functions of the phased out Pro-Mexico organization, but, as of yet, has not delivered significant visible results.  At this juncture, the Secretariat of the Economy does not have certified economic development staff at every Mexican consulate and embassy abroad.  Additionally, a specific budget to be used for the purpose of attracting businesses from abroad to Mexico has not been officially formulated and allocated.  Putting together a coherent effort to attract foreign direct investment is one of the challenges that the current Mexican administration must overcome.

In addition to the aforementioned points, there are opportunities for the Secretariat of the Economy to collaborate with various Mexican chambers of commerce and other organizations that have a presence abroad to disseminate investment promotion materials, as well as to work together to create an environment that is more conducive to increased inflows of FDI.

What can the Mexican state governments do to take advantage of the United-States-Mexico-Canada Agreement?

To take full advantage of the United-Mexico-Canada Agreement Mexican state governments must work to make an objective assessment of regional competitiveness to be able to determine which industries would be feasible to attract.  Additionally, state governments must modernize their online platforms so that most businesses can be conducted digitally and so that they are able to collect and disseminate information from and to companies in the industries that they are seeking to attract.

In some instances, several state governments will be best served by working together to bring entire supplier networks to their regions, as not all suppliers to a specific industry will locate to one single state.

States must also improve their regulatory environments.  Protocols and mechanisms should be established to enable local authorities and businesses to collaborate to streamline procedures and information collection methods.  States that succeed in creating a friendly business environment will be successful in attracting new investment to their communities.

What can municipal governments do?

In order to take full advantage of the United States-Mexico-Canada Agreement, municipalities should work with economic policymakers and members of the business community to generate information on industry and the availability of incentives in their communities.  This is especially important because cities, states, and countries conduct a constant keen competition to attract employers to their regions.  In addition to general information on industry and incentives, municipalities must present labor skills and costs comparison information, real-estate cost data, information on education, physical, and transport infrastructure, and a description of the quality of life aspects of the local community.

They also can work on improving their infrastructure in ways that will reduce business costs and the time required to bring investment to fruition. This includes the implementation of regulatory simplification and improvement programs and the professionalization of all municipal departments that interact with potential employers.   These things must be done with strict adherence to international standards and best practices in the promotion and attraction of investor companies.

Additionally, efforts should be made to develop supplier networks and human capital.  In order to have success in these endeavors, local authorities should make it a conscientious point to meet regularly with local business leaders in order to get the feedback that is necessary to stay informed and to improve their business attraction strategies.

What can the private sector do to take advantage of the United States-Mexico-Canada Agreement?

The Mexican private sector must professionalize the services that it offers to its customers, as well as take a proactive attitude towards seeking and accessing new business opportunities.  They must work to be efficient so as to offer potential customers a competitive price for their goods and services.  Also, they must work with the applicable business chambers in order to disseminate information about their services, to provide employee training, and to guide the development of B2B services for their partners.

Conclusions

The biggest challenges for the national, state and municipal authorities in Mexico are related to the creation of a business environment that ensures certainty for investors.  Issues to consider in the establishment of such circumstances include consideration of rules and regulations that govern taxation, security matters, governmental transparency, and lack of corruption, as well as the rule of law as it is applied to investors, among others.

Another significant challenge that Mexico may come in the wake of the global coronavirus pandemic.  Because of matters related to health concerns, many companies are anticipating the automation of more of their processes.  This being the case, many of them will decide to locate operations in countries that have better electricity, academic, telecommunications, and technological infrastructure.  With respect to these considerations, the US and Canada are currently more competitive.  In order to be successful in attracting foreign direct investment now and going forward, Mexico must increase its capacity for cost-effective electricity generation and distribution, as well as its transportation and fiber optic infrastructure.  If these improvements are not made, Mexican competitiveness will continue to depend mainly on its offering of low-cost manufacturing labor.